Just as quickly as they approach, the holidays will be over, and you know what that means – tax season. Last year, President Trump signed a new tax plan into law for 2018. The new law changed the federal income brackets, which should result in more money in your pocket at the end of the year.
The United States currently uses seven federal income tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If you make $90,000 as a single filer, that doesn’t mean you owe Uncle Sam 24% of your income. The U.S. uses a marginal tax rate, meaning you pay the rate on only the amount of your income that falls into a certain range. In the example above, if your taxable income is $90,000, you’ll only pay 24% on $7,499 as that is your top marginal tax rate.
2018 Taxes Changes
Trump’s new tax law lowered the top rate for five or the seven tax brackets and increased the standard deduction from $6,350 in 2017 to $12,000 in 2018 for single filers. The personal exemption has been suspended through 2025. It’s important to remember that the ACA individual mandate is still in effect for the 2018 tax year and if you didn’t have health insurance for 2018, you may be fined. The individual mandate will no longer be a requirement starting January 1, 2019. Individuals can still deduct up to $2,500 on the interest paid for student loans every year, and new homeowners can include mortgage interest paid on a new home in their itemized deductions.
2018 Taxes for Self-Employed
Self-employment has its pros and cons. Being your own boss and managing your own schedule can certainly be exciting but being self-employed can also be more expensive. Self-employment tax takes the place of FICA (Social Security and Medicare payroll taxes) withholdings, and the amounts are often higher than what employees of companies typically see in their paychecks. Plus, you need to pay your taxes quarterly. The total self-employment tax rate for 2018 is 15.3%, which includes the following:
- 12.4% Social Security (employees and employers pay half typically in a W-2 position)
- 2.9% Medicare (employees and employers pay half typically in a W-2 position)
Then, of course, you must pay income tax on top of that. But, new this year, is the 20% “pass-through deduction.” The deduction is calculated as 20% of your “qualified business income,” and is available for S-crop, LLCs, partnerships, and 1099 contractors and business owners. For self-employed or 1099 contractors, it’s important to remember that you should be making quarterly estimated tax payments to the IRS. There are a couple of exceptions, like if you expect to owe less than $1,000 in taxes, but it’s best to play it safe with Uncle Sam. Taxes can be complicated, so it’s best to work with a tax professional if you have questions or need help filing this year. For more information about 2018 taxes, please visit https://www.irs.com/articles/2018-federal-tax-rates-personal-exemptions-and-standard-deductions.